Market snapshot: recession odds put at 50:50

None of the fears currently unsettling markets are going away and any rally is proving brief. Our head of markets brings you up to date with latest developments and thinking on future direction.

Markets remain on the back foot as the latest comments from the Federal Reserve did little to assuage investor concerns.

Indeed, there seems no end in sight in the immediate future for this situation to change. Comments from Fed Reserve Chair Jerome Powell made their position clear. Interest rates will continue to rise, and at an accelerated pace, until there is “compelling evidence” that inflation is beginning to wane. 

This in turn decreases the likelihood of a soft landing for the economy, which the Fed fully recognises. Of course, the central bank is not attempting to induce a recession, but the outcome of its current stance is increasingly likely to provide one.

Indeed, some economists are already calculating the risk of a recession as having recently risen to around 50%, and the blunt tool of interest rate hikes may not of itself be sufficient. This round of inflation is not the result of overheating demand, but rather the lack of supply and low production capacity after the pandemic restart stalled. With supply chains in general still feeling the strain, the odds are stacked against a smooth glide path to recovery.

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In the meantime, and perhaps unsurprisingly, risk assets have struggled to maintain any momentum from the brief relief rallies which have punctuated trading sessions over the last few months. The main US indices remain in or around bear market territory, with the Dow Jones currently down by 16% in the year to date, the S&P500 by 21% and the Nasdaq by 29%.

Asian markets also endured a mixed performance on the general global outlook, although some strength was seen in Chinese technology companies following the approval of a plan for more development in the fintech sector.

Despite China’s struggles in coping with the latest round of Covid-19 concerns which has resulted in lockdowns in key areas, the authorities have reiterated their stance to intervene with monetary stimulus if necessary, contrary to the tightening being seen elsewhere.

The more recent dip in the oil price on reduced demand and a stalling of commodity prices for similar reasons, have taken some of the sheen from the previously robust performance of the UK’s flagship index. The FTSE100 is now down by 4.5% in the year to date, having spent most of the year ahead, in stark contrast to many of its global peers.

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The sense of caution remains pervasive and the search for positive catalysts is becoming increasingly elusive. The nearer term outlook is fraught with difficulty, yet the impending quarterly results season will be one with the potential to surprise positively, if only because current expectations are so markedly low.